Centre Main

Official PositionsFinancial Reporting: 

Fair Value Reporting

 

How should assets and liabilities be reported in the financial statements?

Position: All assets and liabilities should be reported at fair values based upon market values for identical or similar assets or liabilities.

Rationale:

  • Fair value information is the only information useful for investment decision-making
  • All investor decisions to buy or sell assets, or to lend or borrow money, are based on current fair market values
  • Thus, investors require up-to-date information on the fair values of assets held by a company and the claims against those assets
  • Fair values should be determined based upon the market values for identical or similar assets or liabilities
  • Where models are widely used in the markets for valuing financial instruments, the models should be applied using market inputs
  • Entity-specific or managers’ estimates of fair values based upon their own judgments do not qualify as fair values
  • At a minimum, all financial instruments should be reported at fair values

 Where stated: Letter to SEC on Progress Report of the Advisory Committee on Improvements to Financial Reporting 22 July 2008; Letter to SEC on Progress Report of the Advisory Committee on Improvements to Financial Reporting 31 March 2008 (PDF); Letter to IASB on Amendments to IAS 39: The Fair Value Option 15 March 2005 (PDF); Letter to IASB on ED 7, Financial Instruments: Disclosures 1 November 2004 (PDF); Letter to IASB on Exposure Draft of Proposed Amendments to IAS 39 Financial Instruments 12 July 2004 (PDF); Letter to FASB on Fatal Flaw Review-SFAS 150, Amendment of Statement 133 on Derivative Instruments and Hedging Activities 21 February 2003; Letter to IASB on Exposure Draft of Proposed Improvements to IAS 32 and IAS 39 16 December 2002; Letter to FASB on File 1100-163 Amendment of S133 17 July 2002; Letter to IASB on JWG Draft Standard and Basic Conclusions, Financial Instruments and Similar Items 18 January 2002; Letter to IASB on Exposure Draft ED 5 Insurance Contracts 6 November 2003 (PDF); Comprehensive Business Reporting Model

 

Opposing Argument:

  • Some have argued that fair value measurement will introduce estimates, inaccuracies and subjectivity into the financial statements, reducing their reliability and usefulness to investors and other users.

 

CFA Centre’s Position Regarding Opposing Argument:

  • This argument is disingenuous at best, and displays a lack of understanding of financial reporting at worst
  • All numbers in the financial statements, including cash, are estimates rather than precisely correct figures
  • The alternative to fair value is historical cost measurement. Although historical cost measures in many cases reflect fair values on the date of the transactions, such numbers are not updated or revised from the transaction date onward
  • Hence, the numbers are increasingly out-of-date as time passes and do not reflect the economic effects of the company’s operations and managers’ decisions
  • Furthermore, because many of the historic cost numbers are subject to arbitrary and varying amortization schedules, or estimates of impairment, the numbers may more accurately be said to reflect the whims of managers rather than economics, and their usefulness may be marginal at best
  • Since all financial decisions are based on fair values, the financial statement items should be measured based on fair values